Cutbacks at two major banks, the exit of a utility company from the Magic City, and stagnant job growth in the area are expected to create more than 1.1 million square feet of empty office space in downtown Birmingham by the end of next year.

“We are in a reduce, reuse, recycle phase in the office market,” said Emily Byrd, a commercial broker with Corporate Realty Associates. “Due to the changing landscape of downtown and the evolution of how companies use space, we have a number of buildings that are either in need of updating or not being utilized for their highest and best use.”

The Central Business District of downtown Birmingham - the largest office submarket in the metro area - has 6 million square feet of office space. A big chunk of that is in the city’s high-rise buildings.

At the end of this year’s third quarter, 12.3 percent of office space in the Central Business District was vacant. This is about 740,000 square feet of office sitting empty, according to Cushman & Wakefield / EGS Commercial Real Estate.

Cutting back

Regions and Wells Fargo banks are reducing their presence in the downtown core.

About 200,000 square feet of space was vacated by Regions in the Regions-Harbert Plaza. They moved into renovated offices at Regions headquarters on Fifth Avenue North.

Wells Fargo is cutting about 100,000 square feet of space in downtown next year, brokers said.

Julie Ryland, vice president of investor relations for Energen, confirmed the company is relocating to Midland, Texas. “Post transition there won’t be an Energen presence in Birmingham,” she said.

She said she didn’t know when the company’s 150 employees would vacant the downtown building.

Energen Plaza will be vacant sometime in 2019 after the company is acquired by Texas-based Diamondback Energy.

Few new white-collar jobs

Downtown Birmingham will likely see more than a 1 million square feet of empty office space because of stagnant job growth, said Brad Jones, senior vice president of Cushman & Wakefield / EGS Commercial Real Estate.

“We keep seeing jobs going to other cities,” he said.

The Birmingham-Hoover metro has only seen 1 percent job growth over the last year, according to the U.S. Bureau of Labor Statistics.

“We would be able to do more deals if we could figure out how to increase the number of jobs in the city,” Jones said.

“If Homewood, Vestavia, Hoover (and other municipalities), continue to compete against each other and the city of Birmingham, we won’t be able to accomplish this, he said. “Municipalities will continue to poach office users from their neighbors with tax breaks instead of working together to actually bring new jobs to the region.”

Companies, in general, don’t need as much office space as they did a decade ago.

Formerly, companies would lease 350 square feet per employee. Now, due to open-concept offices they need as little as 180 square feet per employee, said William Ledbetter, a broker with Cushman & Wakefield / EGS Commercial Real Estate.

Also, office space in the downtown core is aging, brokers said.

“Downtown Birmingham hasn’t had new, multi-tenant/spec office construction since 1989 (with the construction of the Regions-Harbert Plaza),” Sedita said. “Office rents in our market don’t support the cost of new construction and until they do, we will be limited to redevelopments (of smaller office buildings) like The Iron Age Building and The Frank.”

The former AT&T City Center building in downtown Birmingham sold for $31 million.

Here’s the good news

The former AT&T City Center high-rise in the heart of downtown sold this month to an out-of-state group for $31 million. The group, VCP City Center, which is managed by Varden Capital Properties and Tellus Multifamily, plans to redevelop the vacant office building into a mixed-used concept that will include residential, restaurant and office space.

The nearly 700,000 square foot, 30-story building has been vacant since AT&T employees moved out in February. The property sits at the corner 19th Street North and 6th Avenue North and features an adjacent six-story parking deck.

Jones said the deal is a big success for Birmingham and will continue the redevelopment trend in downtown that’s been largely restricted to historic buildings.

This summer Shipt announced plans to keep its headquarters in downtown Birmingham and add 881 new jobs. The app-based delivery service, which was acquired by Target Corp. last year for $550 million, received incentives from the city, county and state to stay put.

“They are one company that is adding a considerable number of jobs,” Jones said. “Their commitment to stay in the CBD is real. They are going to add 50,000 to 60,000 square feet of additional space.”

Several historic office buildings downtown are currently being turned into hotel, condo and restaurant space.

Birmingham-based Rhaglan Hospitality is in the process of renovating a former office building -- known as the commerce center or former Protective Life Building -- and the two-story attached Morris Avenue Building into a new 96-Tapestry Hilton Hotel.

Ascent Hospitality is expected to redevelop the vacant Brown Marx office building into a hotel next year.

Birmingham-based Orchestra Partners purchased The Frank Nelson Building on 20th Street North with plans to modernize the historic buildings’ nearly 100,000 square feet of office space.

In an interview with CoStar, a provider of commercial real estate data, Orchestra Partners co-founder John Boone said there is a demand for updated office space despite downtown’s high vacancy rate.

"The issue is that people aren’t building what tenants actually want," Boone told CoStar. "The big trend right now is open, collaborative office spaces… [The Frank] is our attempt to deliver some really cool office space right in the heart of downtown."

Sedita said Orchestra Partners is “bringing new life and a new vision to Birmingham.” If lease prices are right, he said the company will continue to see success with a younger generation of office users.

“Price per square foot is higher (there) than any other place in Birmingham,” he said.

The district is riddled with adaptive reuse projects, including former industrial space near Railroad Park and Regions Field being transformed into residential, restaurant and office space.

The vacant Denham Building at 1143 First Avenue South is currently being converted into mixed-use space that will include 81,000 square feet of office, retail and restaurant space, along with 59 urban-loft units.

A former Merita Baker at the corner of 1st Avenue South and 14th Street South was redeveloped into collaborative office space two years ago. Economic Development Partnership of Alabama, KPS Group, Under Armour and Corporate Realty have offices there.